Why does the world need cryptocurrencies

Yes, it may even sound funny today, but many people do not understand the purpose of crypto assets. They either did not delve into the essence, or simply do not take them seriously. But how can one not take seriously assets whose value has exceeded 2,678,526,972,755 US dollars?

Let’s talk about Bitcoin, blockchain and cryptocurrencies. The guide will help readers take the first steps to understanding the crypt. It is not difficult, it is clear and contains no Chinese technical language.

So…

Cryptocurrencies have arisen because of a specific problem. For example, if a person gives a friend a 50-ruble bill in “real” life, this is a process without intermediaries. In other words: the transaction takes place directly from point A to point B, and no one knows about it. No one can stop it.

On the other hand, this type of transaction does not exist on the Internet. And it’s not just that it’s money. Other values also play a role here. Of course, money can be sent via PayPal or similar service providers, or you can make a digital bank transfer. The difference is that users depend on organizations such as banks or payment service providers for these transactions:

In systems based on such central institutions, people always have to put up with them. Without them, we cannot make a single economic transaction. This inevitably gives these intermediaries more power. It may happen that PayPal cancels transactions or even blocks the entire account because the owner violates the general terms and conditions.

Of course, we trust our banks and believe that we can dispose of our money at any time. However, in the past, it often happened that this was not the case. An example of this is the so-called “run out of the bank”, when too many people want their deposits to be paid in cash at the same time. In addition, intermediaries earn money on almost all transactions: at the expense of bank commissions, transaction fees, brokerage commissions, etc.

The consequences of this concentration can be felt in the last few years, primarily in central banks, whose monetary policy has influenced the fate of entire continents. With such a low key rate, and the fact that central banks are massively printing money to support the economy, conservative depositors in Europe and America are in a bad position. We have long come to terms with the fact that “everything used to be cheaper” due to constant inflation. This, of course, is not entirely true, because salaries were also growing. However, these processes devalue the saved assets.

Over the years, there have been many counter projects of dependence on central currencies, especially on the Internet. However, the main problem remained the same. As soon as a company issues a digital currency, all users of the currency depend on the well-being and troubles of this institution. This is one of the reasons why digital tokens have not been widely used as a means of payment on the Internet.

Another aspect was that companies and individuals cannot offer the security that the central bank has as a representative of the government.

The first cryptocurrency

As Coinmarketrate.com narrates, the breakthrough discovery was made in October 2008 by a man named Satoshi Nakamoto, who described the new technology in the white paper. It allowed transactions to be carried out in digital currency in such a way that all participants could trust the correctness of transactions. There is no central point that tracks account balances. This is how the digital currency Bitcoin (BTC) was born. With its help, the concept of the so-called blockchain and decentralized consensus was established.

The stated purpose of Bitcoin was, on the one hand, to offer an alternative to money issued by central banks. In addition, the technology should allow you to send money digitally from point A to point B (peer-to-peer network) without having to rely on intermediaries.

The emergence of movement

The breakthrough of the level of trust on the Internet, which did not require an intermediary, and the possibilities associated with it were initially understood by only a few. First of all, the followers of the philosophy of individual freedom of action and freedom of thought – libertarians, found as a result more and more pleasure in this independent form of money.

There were also technology enthusiasts who played with the software and started “mining” Bitcoins (new coins are generated through mining). Out of passion, a new worldview regarding money, values and property emerged, characteristic of Bitcoin enthusiasts, who are still the cornerstone of this movement.

• “Be your own bank” – the main focus is on sovereignty over your own financial resources. No one should have the right to devalue (inflation), control or confiscate money.
• No one should have the right to censor, prohibit or prevent payments.
• The privacy provided to every citizen is also important for online transactions.
• All fiat currencies (money issued by governments) have no long-term future because they are inflationary, and have not been “supported” by anything since the abolition of the gold standard.
• The separation of money creation and the state, so that monetary policy and interest rate policy are also subject to the laws of the free market.
• Bitcoin is a digital substitute for gold as the currency of the crisis, having a number of properties that gold does not have: divisibility, ease of delivery and storage.

Briefly about the concept of blockchain

Instead of controlling or storing information, data, or monetary values in one place, all processes are stored at regular intervals in blocks in a continuous list of transactions (chain) that are distributed across many thousands of computers on the network. This decentralized repository alone is not enough to establish a stable trust relationship.

Each individual action is additionally approved by the network. Then the valid transactions are combined into a block and added to the block chain using complex computational processes. This process, known as mining, requires a lot of computing power. The whole process that establishes trust in the transaction history is known as consensus Proof of Work.

The term “cryptocurrencies” comes from the fact that some processes use cryptographic encryption methods. Since blocks are built on top of each other, it is almost impossible to add incorrect transactions to an older block in the block chain.

This method means that transactions involve more than one or more intermediaries. There is constant mutual control throughout the network. In addition, the system performs two properties that are crucial for the global network. Due to the fact that users and miners are scattered all over the world, it is impossible to disable the system. And the account balances received as a result of the transaction history cannot be changed.

Bitcoin is not the only cryptocurrency

The first use case for blockchain technology, which is also known as distributed ledger technology, due to its storage in many “ledgers”, was the Bitcoin cryptocurrency. Bitcoin works like a currency from “real” life: it can be divided into any smaller units.

Users pay with coins for services and goods, they use them for purchases in online stores or exchange of BTC for other currencies. All movements are fully documented in the Bitcoin blockchain (but without personal data). But the Cue Ball is not the only one.

In the following years, programmers have developed many (today – 21,600) new cryptocurrencies, protocols and systems based on blockchain technology. Some copied BTC with different properties. Others are trying to create completely new use cases. Many currencies have their own blockchain or storage method. An example is the Decimal Chain (DEL) blockchain project, the review of which can be found here.

Why Cryptocurrencies Have Value

In most cases, people first learn about Bitcoin and crypto when their price reaches a new high or a crash occurs. But why does the cost fluctuate so much? And why do cryptocurrencies have value at all? After all, in reality, they don’t even exist? To do this, you need to know why something is valuable to people in the first place.

As the eastern wisdom says, value is in the eyes of the beholder. In this context, it occurs when a thing is limited in availability and has a use.

The current value of cryptocurrencies primarily reflects assumptions about their future use. At the dawn of the Internet, investors appreciated the profits from the new technology so highly that a bubble (the “dotcom bubble”) appeared in 2000. We have seen something similar with Bitcoin. The difference is that investors are not buying the company’s shares, but the supposed digital equivalent of gold, a limited resource that can be used.

Compared to the precious metal, cryptocurrencies have a number of advantages. Storing gold is inconvenient and expensive, and Bitcoins can be stored without financial costs. Coins can also be divided at will and shipped worldwide. Most crypto assets can be exchanged for other currencies or items in a fraction of a second. Transactions require only a small amount of technology, and a few mouse clicks.

The current price is always the amount that someone is willing to pay for a coin, or for which someone would like to sell their BTC. Bitcoin is no different from stocks, gold or other financial instruments based on supply and demand.

Blockchain is More than Just a Currency

Digital money is the most obvious way to use blockchains. But a decentralized transaction history can be more than just a currency basis. Companies, especially from the financial sector, industry and logistics, expect unprecedented transparency from this.

Many large corporations are currently researching this topic in their own departments. In the legal field, blockchains can replace contracts and intermediaries in the long term. And if you look at the Internet of Things (IoT) or artificial intelligence (AI), the chain of tracked transactions simplifies many processes.

But not only the blockchain application scenarios have grown. In addition to blockchain, there are now other approaches to the question “How to create trustless systems for digital applications?”. Examples: Tendermint, Hyperledger, IOTA and Dfinity.

Under the crossfire of public opinion (on the one hand, speculative, on the other – with huge potential), cryptocurrencies have been slowly but steadily gaining strength in recent years. It was only after the sharp rise in the price of bitcoin in the last quarter of 2017 that it came into the spotlight.

Now, after the military-technical cooperation has again attracted attention by reaching a new ATN, many questions arise, especially among laypeople. What should you invest in? How do shopping and trading work? And what else is there besides the capabilities of a financial application? We will address these issues in the next part of our guide.

End of the first part.